To buy the home that’s right for your household, you have a lot of decisions to make including, location, size, bedrooms and baths, and features. That’s when you should ask yourself: How much home can you really afford?
Nearly every buyer compromises on something, like getting a fixer-upper house instead of a new home, or buying a smaller home in a more expensive neighborhood. But you have to know how much you can spend before you make those decisions.
Lenders qualify you for a mortgage with a conforming loan standard that uses two ratios – income to mortgage debt, and income to total debt.
To qualify for a federally -insured 30-year fixed rate conforming loan, your income to mortgage debt can be no higher than 31% of your gross annual income, and your debts plus mortgage payment can be no higher than 43% of your gross monthly income, according to FHA.com.
If you make $5,000 gross income per month, under a conforming loan standard, your house payment (principal, interest, mortgage insurance, hazard insurance and taxes) should be no larger than $1,550.
If you’re carrying credit card debt, student loan debt, or paying child support, the monthly debt service must be factored in. To get the income- to-debt ratio, multiply your monthly income by 43%. With an income of $5,000, your total debt including your house payment can be no larger than $2,150.
Once you know how much home you can comfortably afford, it’s easier to choose the neighborhoods and homes that are within your range.